Wolves in sheep’s clothing: Is non-profit status used to signal quality?

Abstract

Why do many firms in the healthcare sector adopt non-profit status? One argument is that non-profit status serves as a signal of quality when consumers are not well informed. A testable implication is that an increase in consumer information may lead to a reduction in the number of non-profits in a market. We test this idea empirically by exploiting an exogenous increase in consumer information in the US nursing home industry. We find that the information shock led to a reduction in the share of non-profit homes, driven by a combination of home closure and sector switching. The lowest quality non-profits were the most likely to exit. Our results have important implications for the effects of reforms to increase consumer provision in a number of public services.